Commodities and currencies

With two weeks of negative results in global stock markets that seem to have been triggered by the downgrading of US debt by S&P, our return to the office was focused on looking at opportunities in commodities and currencies.

We are concerned that the USD has a long decline ahead of it as de leveraging from its consumers and government will imply low real GDP growth. They have an incentive to print money as foriegn debt issuance is also in USD. This will encourage the authorities to increase the money supply to dilute the current debt load and encourage a changing economic structure by weakening the currency to help support exports, and put pressure on exporting countries that have currencies pegged to the USD.

We are looking at opportunities versus the MXN and KRW. Chile and Peru are also economies worth studying.

The problem is USD cash. We can hedge by simply investing the USD cash. Fears of weak real economic growth can be partially covered by put options on the stocks we hold.

But why use that cash in put options when can keep the cash and wait for more opportunities?

But then predicting markets? The cash may depreciate, the stock prices may increase, we may be priced out of the market.

Invest in the put option, it can become bigger if markets do fall so can have more to invest later. Whilst we reduce the net long position of the portfolio.

But perhaps can focus on companies and the management of this portfolio, rather then currencies and commodities and other secondary ideas.

Better securities on companies which have more understanding then filling the portfolio with secondary ideas.

If see mis pricings in commodities and currencies they can play a role. but dont be forced to do it. Keep ideas waiting until the price is ready, whether it is real commodities, stocks, bonds or currencies. But we need a broad understanding and have an approximate valuation in which we are willing to buy.

However, currencies are bought because they behave in a certain way in certain environments, or because they have good companies and may want to buy later when their price has dropped but the currency may be expensive. But can also use forward contracts.